As a commercial solicitor, I regularly see clients who are required to provide a personal guarantee in respect of transactions connected with their business.
It is common for lenders and landlords to require personal guarantees as additional security when dealing with closely held companies.
The form and content of guarantees vary so, if you are asked to provide a personal guarantee, it is important that you thoroughly understand the extent of your liability under that guarantee.
Guarantees can be limited or unlimited and can relate to a specific obligation or all the obligations owed by the customer to a lender.
In the case of an all obligations guarantee, the guarantor is guaranteeing all past, present and future obligations owed by the customer to the lender.
In most cases, it is up to the guarantor to monitor the customer's activities and stay informed as to the extent of the obligations taken on and whether those obligations are being met.
Even guarantees that have a monetary limit can stay in place after the original debt has been repaid. This is why it is important to contact the lender and ask for written confirmation that your guarantee has been released once the original debt has been repaid.
The High Court at Christchurch recently considered the question of whether guarantees had been released in the case of Mindie Ltd versus Winstone. Mr Winstone and the second defendant, Mr Evans, were directors of a company which obtained loans from Mindie.
The loan agreements were short, being no more than one page in length, and included a simple guarantee, which provided that Mr Winstone and Mr Evans jointly and severally guaranteed that they would personally repay the loan in full if for any reason the debtor company did not repay the loan. The loans were not repaid and Mindie sought to enforce the personal guarantees.
The court accepted that there was evidence that the terms were extended and that the loans were used for different purposes over time. Mr Winstone and Mr Evans claimed that they had not consented to the variation of the loans as guarantors and therefore had been discharged from their guarantees. Mr Winstone and Mr Evans relied on the equitable principle that a guarantor is discharged from liability when the creditor grants an extension to the debtor without the consent of the guarantor.
The court rejected the defendants' argument. Mr Winstone and Mr Evans were directors of the debtor company and, as such, there was every opportunity for them to protest such extension of the loan. As guarantors they did not. On the contrary, they were agreeing to it and indeed wanted it. Accordingly, the guarantees were enforceable against Mr Winstone and Mr Evans.
This was not a question of whether the court should draw a legal distinction between the defendants' roles as directors of the borrower and as guarantors in their personal capacity.
Rather, it was a question of the defendants' factual knowledge and their opportunity to refuse to consent to the variation of the terms of the loans. If it had been the intention of the parties that Mr Winstone and Mr Evans were to be released from their guarantees upon the variation of the loans, it should have been recorded in writing.
It is important to note that a typical all-obligations guarantee would be enforceable against a guarantor despite the terms of a loan being varied. Guarantees prepared by banks typically address the issue of amending the terms of the loan or replacing the loan in its entirety. In Mindie the guarantees related to the specific loans and did not make provision for the terms of the loans to be varied.
• David Smillie is a partner in law firm Gallaway Cook Allan.
